KEY INVESTMENT HIGHLIGHTS

• Earnings within expectations. Better performance in 3QFY19 due to lower OPEX and ECL

• Income flat but as expected given declining NII. Treasury income supported total income

• High ECL due to triggered by certain variables

• Asset reorganization, decreasing personal financing portfolio

• Took advantage of banking license to reorganize deposits

• Maintain earnings forecast. Maintain NEUTRAL

Within expectations. Malaysia Building Society Bhd (MBSB) posted - 31.3%yoy decline in net profit for 9MFY19. However, performance rebounded in 3QFY19 whereby earnings expanded +39.5%yoy on account of lower OPEX and ECL. As a result, the 9MFY19 earnings were within our expectations at 73.2% of our full year estimate. However, it missed consensus’ at 68.5% full year estimates.

Higher ECL due to forward looking variable in model. The 9MFY19 ECL was RM326.1m as compared to RM62.6m in 9MFY18. Main reason for the higher ECL was it was triggered by certain variables and timing issues. There were recoveries to the tune of RM10.5m. Moving forward, the management indicated that it will be enhancing its ECL model to better reflect its asset quality and smooth the variability.

Lower OPEX supported PPOP. Meanwhile, MBSB's 9MFY19 PPOP grew +1.1%yoy. The driver was lower OPEX which fell -3.7%yoy. We believe that it is commendable that MBSB managed to contain its cost, especially given that it is on an expansionary path. This lead to CI ratio to be maintained below 30% level at 26.7%.

Flattish income to be expected. Total income was flat at -0.3%yoy. However, this was to be expected as it converts to an Islamic bank, running down its NII. Consequently, Islamic banking income grew +2.2%yoy due to financing growth. Fully taking advantage of its banking license, NOII rose +80.6%yoy. Treasury income (which included in Islamic banking income) grew +41.7%yoy to RM326m.

Asset reorganization affected financing growth. Gross financing expanded by only +1.8%yoy to RM36.5b. However, this was deliberate as MBSB reorganizes its asset mix. Its personal finance portfolio fell - 3.6%yoy to RM20.3b. This was replaced by higher financing to corporate which grew +11.8%yoy to RM10.1b and to a certain extent house financing which grew +11.4%yoy to RM5.9b. The retail to corporate financing ratio stood at 28:72.

Taking advantage of banking license. Besides treasury income, we opine that MBSB also took advantage of its banking license to reorganize its deposits. Customer deposits fell -14.3%yoy to RM27.2b due to contraction in more expensive time deposits, which fell -14.6%yoy to RM26.9b. This was substituted by interbank deposits which grew to RM10.4b from RM1.8b as at 3QFY18. CASA also saw good growth of +20.1%yoy to RM317.7m.

Digitization key to growth. One area in which we were content with was the pace of digitization which MBSB had initiated since FY18. We believe that this will be key for MBSB to be able to compete. However, we have yet to see traction such as in CASA acquisition but this could still be early days.

Maintain earnings forecast. As the result was within expectations, we are maintaining our earnings forecast.

Valuation and recommendation. As we have previously mentioned, we believe that MSBS is still building its base having only converted to a banking entity in 2QFY18. Nevertheless, we opine that MBSB are starting to reap some of the benefit of being a bank. Our concern for now is on its asset quality which GIF ratio remaining stubbornly high at 5.71% (Group level) as at 3QFY19 and the high ECL. In addition, uncertain external environment may put further pressure to its ECL, affecting earnings. In our view, this will moderate the gains in operational performance. Therefore, we maintain our NEUTRAL call. We are also maintaining our TP of RM0.93, pegging its FY20 BPS to PBV multiple of 0.65x.

Source: MIDF Research - 21 Nov 2019